What It Costs
The total costs for a payday loan depends on quite a few variables. The main factors that can affect what you will spend include where you live (since some states cap the interest rate, while others don’t regulate it at all), the type of lender you contract with (there are “low” cost lenders that charge a minimally lower interest rate than their counterparts, and Internet companies that may chare even more), how much money you borrow (the fees are often calculated on the total) and the length of the loan (the longer you have the money, the more it will cost).
With all of these variables that exist, you can assume a payday loan can cost you in the range of $15 to $30 for every $100 you borrow for a short time. It is also important to remember that each time a loan becomes due and you roll the balance over again, the fees is due again. This means that if you have a $400 loan for two weeks with a fee of $80 (which is $20 per $100), if you pay it off when it’s due, it will cost you $480 for the loan repayment and the fees. However, if it takes you twelve weeks (or six loan periods) to repay the balance, this can cost you a total of $480 ($80 x 6 loan periods) in fees, plus the original $400 you borrowed for a total of $880 due. So it means in the end you are paying more than double the amount you need.
Further, sources that track payday loans estimate that these fees can average in the range of 400 to 800 percent annual percentage rate (APR) on the amount you borrow. In some cases, the APR can be even higher. One expert even points to loans that charge as much as 1200 percent. But even with some of the more “average” interest rates, this is clearly one of the most expensive types of loans that exist.
However, if you live in a state that has a cap on small loans also called a usury cap, you may have some protection in place that limits what lenders can charge you for this money. The cap can be in the range of 24 to 48 percent APR, which is a significant difference.
Other Options
If you need some extra money quickly to help you to cover your bills, you may want to pursue some other options and save a payday loan as your last resort. For instance, a cash advance on your credit card with high interest rates (such as at 30 to 50 percent APR) can be a lot less expensive than taking a payday loan in states without a cap on the interest rates. You may also be able to talk to your creditors and work out a payment plan or get a short-term loan from a local bank or credit union, which is often offered at more reasonable interest rates. When considering different loan or cash advance options, be sure to compare any fees, finance charges and APR to determine the full cost of the loan and make an educated choice.
Protection For Members Of The Military
The federal government recently put some important protections in place for members of the U.S. military to prevent lenders from taking advantage of them. Lenders can’t charge more than 36 percent APR and this amount must include all fees. But even with these restrictions, the price of a payday loan is still often not the most cost effective option to help make ends meet.
A Final Note
To learn more about payday loans and to find out your rights as a consumer, you can visit the Federal Trade Commission or call their hotline at 1-877-FTC-HELP.
